NEW YORK & SAO PAULO--(BUSINESS WIRE)--Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of Banco Industrial do Brasil S.A. (BIB) at 'BB-'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
BIB's ratings reflect the bank's stable risk profile, adequate and stable performance, good asset quality, liquidity and capitalization. This is supported by BIB's consistent focus on small and medium-sized businesses, its risk culture and the historically solid quality of its assets, as well as adequate liquidity. These factors are offset by the bank's small size, its relatively modest profitability and the asset and liability concentrations inherent to its business model.
Over the last several years, the bank's good asset quality has been maintained, even taking into account the strong loan growth of 81.5% from December 2009 to December 2012. Leverage is still low (equity to assets of 19.9% in June 2014) and compares favorably with other wholesale-funded banks focused on the SME market. The stability of its non-performing loans (90 days past due loans) of 1.0% in June 2014, 2.9% in 2013 and 0.8% in 2012) reflects the result of its conservative appetite for credit risk.
The bank's profitability is lower than similar wholesale-funded banks that focus on the SME market but shows some consistency and has presented a consistently adequate return on average assets (ROAA of 2.10% in 1H14, 1.45% in 2013 and 1.75% in 2012). Results have improved amidst a scenario of weak macroeconomic performance as the bank has benefited from improvements in terms of funding costs and a subdued competition in the SME segment as midsized players and large private banks have reduced their appetite by smaller SME clients and focused more on upper middle market and low corporate names. BIB has continued with its stringent credit risk management and limited loan growth appetite. Fitch expects BIB's profitability to remain adequate, though slightly lower than its local peers' average.
Over the last several years the bank has focused on the SME segment after it sharply reduced its payroll deductible loan business (roughly 17% of its loan portfolio). The bank's management has focused more on companies in the upper end of the SME segment, and has looked for stronger collateral coverage to reduce the intrinsic risk of the portfolio. The banks has also tried to mitigate the risk of a more challenging economic scenario and the increase in market delinquency, even if this has resulted in a higher asset concentration and higher exposure by the client. In June 2014, only one loan exposure represented more than 6% of the bank's Equity and only the 10 largest represented more than 46% of the bank's equity.
Though concentrated, BIB's funding base has been stable even during more volatile periods. The bank has diversified its funding base as it has been able to access trade-finance lines with multilateral agencies. Since 2H'11, BIB also benefited from the change in compulsory requirement rules for large banks and expanded its local funding base, raising roughly BRL360 million in interbank deposits and letras financeiras with longer terms and lower costs, improving its funding profile despite the higher concentration from the exposure to large banks.
The bank has maintained an adequate liquidity position, with liquid assets comprising 28.0% of total assets in June 2014 (18.6% in December 2013) and a fairly comfortable Fitch Core Capital ratio 17.95% as of June 2014.
A potential upgrade in BIB's IDRs would be contingent on a higher diversification of its funding, product mix and an expansion of its operations that could reduce concentration on both the asset and liability side, resulting in a more robust profitability. Should BIB be able to reduce the difference that separates the bank from its peers in terms of performance and concentration jointly with an enhancement of its overall franchise, its ratings could be positively affected. Ratings could be negative affected by a deterioration in the bank's asset quality ratios, with a subsequent decline in its performance (operational ROAA below 1.0%) and a reduction in the bank's capitalization position (Fitch core capital ratio below 13.0%).
BIB's ratings were affirmed as follows:
--Foreign and Local Currency Long-Term IDRs at 'BB-'; Outlook Stable;
--Foreign and Local Currency Short-Term IDRs at 'B';
--Viability Rating at 'bb-' (bb minus);
--Long-Term National Rating at 'A(bra)'; Outlook Stable;
--Short-Term National at 'F1(bra)';
--Support Rating at '5';
--Support Rating Floor at 'NF'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Financial Institutions Methodology' (Jan. 31, 2014);
--'National Scale Ratings Criteria' (Jan. 19, 2011).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
National Scale Ratings Criteria